Is PayPal Likely To Benefit From Swift Financial Buyout?

PayPal Holdings, Inc. (NASDAQ:PYPL) is acquiring online small business lending firm Swift Financial for an undisclosed amount. The acquisition, subject to regulatory approval, is expected to be completed later this year.

Founded in 2006, Delaware-based Swift Financial provides loans, cash advances and lines of credit to small businesses in the U.S. The company claims that it has funded more than 20,000 businesses since inception.

Both the companies have already been in a commercial partnership, so integration risk is likely to be low.

PayPal Looks to Boost its Lending Business

PayPal has been working on providing a wide gamut of financial services to lure small businesses to its platform and lock existing ones. This is part of its intensified focus on the growing number of active customer accounts since it was spun off from eBay (NASDAQ:EBAY) .

We believe that by acquiring Swift Financial, PayPal will be able to make its financing solutions more accessible and affordable to small businesses, leveraging on the additional underwriting data and capabilities that Swift offers.

This in turn will help the company grow its PayPal Working Capital unit that has been offering short-term loans to smaller merchants since 2013. The unit provided more than $3 billion worth of funds to 115,000 small businesses at up to $125,000 each. PayPal stated that the acquisition will enable it to increase term loans to $500,000 for its larger merchants and also offer sufficient credit to those business who are yet not using its services.

In addition, PayPal will be in a position to give tough competition to companies like Square (NYSE:SQ) , Kabbage and Amazon (NASDAQ:AMZN) in the small business lending space. Square has already passed 1 billion in loans through its Square Capital program. Amazon claims that it has loaned $3 billion to small and medium-sized businesses.

Our Take

We expect the acquisition to significantly boost PayPal’s other value added services revenues that include interest and fees earned on PayPal Credit loans, gateway fees, subscription fees and gain on sale of participation interest in consumer loans receivable and more.

Moreover, since PayPal earns from transactions between merchants and customers, the company, through this acquisition, could boost its transaction revenues by enabling merchants to grow their businesses and enhance sales.

In the recently reported quarter, transaction revenues of $2.75 billion contributed 88% to total revenue and were up 6% sequentially and 18% on a year-over-year basis. Other value added services revenues contributed the rest and increased 3% sequentially and 18% year over year. The company added 6.5 million new customers in the first quarter, taking the total active customer accounts to 210 million.

It also increased its full year guidance. The company now expects revenues between $12.78 billion and $12.88 billion compared with its earlier expectations of $12.52–$12.72 billion. The Zacks Consensus Estimate is pegged at 12.70 billion. (Read More: PayPal Beats on Q2 Earnings, Raises Full Year View)

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